Definition of Capital
Capital is the total financial resources that owners or shareholders inject into a business to fund its activities and acquire its assets. In accounting terms, capital represents the core equity portion on the balance sheet and varies in form depending on the legal structure of the entity.
In sole proprietorships and partnerships, capital is tracked through a Capital Account: opening capital at formation, plus accumulated net profits, minus owner drawings and losses. In joint-stock companies, capital is split into Authorized Capital (the maximum that can be issued), Issued Capital (the shares actually issued), and Paid-up Capital (the portion shareholders have actually paid in).
Equity Capital vs. Debt Capital
By source, capital falls into two main types: equity capital, raised from share issuances or direct owner investment, and debt capital, raised through loans and bonds. Together they form the company’s capital structure. The optimal mix minimizes the weighted average cost of capital (WACC) while keeping financial risk within acceptable limits.
Working Capital
Working capital is calculated as current assets minus current liabilities. Positive working capital signals that the business can cover its short-term obligations from liquid assets. It is especially important in retail and manufacturing, where inventory and receivables need to be financed. A working capital squeeze can push an accounting-profitable business into a liquidity crisis.
Cost of Capital
The cost of capital is the minimum return required to justify an investment. The cost of equity is typically derived from models such as CAPM, which combine the risk-free rate, the market risk premium, and the stock’s beta. The after-tax cost of debt uses the interest rate net of the tax shield. Weighted together, these produce WACC — the discount rate used to evaluate projects.
Capital Increase and Reduction
A capital increase happens when a company needs additional funding to expand or repay debt, issued either through rights offerings or new share issues. A capital reduction is used to absorb accumulated losses or return surplus funds to shareholders. Both actions require legal procedures, general assembly approval, and public disclosure to protect creditors’ rights.
ROIC and Value Creation
Investors watch Return on Invested Capital (ROIC) to assess how efficiently management deploys capital to generate profit. When ROIC exceeds WACC, the business is creating real value for shareholders and deserves a valuation above its book capital. The best companies sustain a positive ROIC-WACC spread over years, signaling a durable competitive advantage.
Capital and Corporate Governance
Capital is governed by the board and the general assembly to ensure it is deployed optimally. Major investment decisions, acquisitions, and share buybacks are all capital decisions that require formal approval. Disclosure of the capital structure, its changes, and the reasons for those changes is a core part of transparency and good governance — and a mandatory element of annual reporting in Saudi Arabia.